LI MINGREN v. QUESTEX DEVELOPMENT INC. AND ANOTHER

CACV 141/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVI l appeal no. 141 of 2014

(ON APPEAL FROM HCA 2081 OF 2013)

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J U D G M E N T

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1. On 13 June 2014, Seagroatt DHCJ gave summary judgment in favour of the plaintiff Li Mingren (“the plaintiff”) against Questex Development Inc. (“D1”) with costs.  The second defendant, Tai Shing International (Holdings) Ltd (“D2”) had filed a Defence on 23 December 2013 stating that it was adopting a neutral stance in the proceedings.

2. On 14 July 2014, D1 filed a notice of appeal against the judgment.  On 2 September 2014, the plaintiff filed a respondent’s notice to affirm the judgment on an additional ground.  No date has yet been fixed for the hearing of the appeal.

Summonses

3. On 7 November 2014, the plaintiff filed a summons for security for costs (“the plaintiff’s security for costs summons”), supported by his affirmation filed on the same day, asking for security in the sum of $601,000.

4.1.  On 12 January 2015, D1 filed a summons for leave to adduce fresh evidence (“D1’s fresh evidence summons”), supported by and contained in the 3^rd affirmation of its director Wang Weinan (“Wang”) which was eventually filed on 22 January 2015.

4.2.  On 16 April 2015, D1 filed a further summons for leave to file Wang’s 4^th affirmation made on 13 April 2015 (“D1’s further summons”), which updated the fresh evidence.

5. It was D1’s contention that the fresh evidence struck at the heart of the plaintiff’s case.  Accordingly if the fresh evidence is admitted, D1 would have a very good chance of success in overturning the summary judgment on appeal, and so no security for costs should be ordered.

6. The plaintiff opposed the summonses for fresh evidence but did not file any evidence in reply to them.  He did not ask to adjourn the summons for security for costs. 

7. I dealt with all three summonses together at a hearing on 22 April 2015.  I heard the summonses for leave to adduce fresh evidence first, and after reserving my decision, I invited the parties to address me on the plaintiff’s security for costs summons on alternative bases, depending on whether the fresh evidence is or is not admitted. 

Background

8. I shall first summarize the background which is material to these summonses.

9. The action concerned a loan of HK$40m said to have been made by the plaintiff to a mainland businessman by the name of Zhao Tuanjie (“Zhao”), who controlled D1 a Vanuatu company which is itself the majority shareholder of D2, a Caymans company listed on the Growth Enterprise Market of the Hong Kong Stock Exchange. 

10. Paragraph 6 of the Statement of Claim pleaded:

“Pursuant to a written loan agreement in Chinese No.20130051402 dated 14 May 2013 (“the Loan Agreement”) between the Plaintiff and Zhao, and a supplemental agreement in Chinese dated 17 May 2013 (“the Supplemental Agreement”), the Plaintiff agreed to lend and did lend to Zhao a loan in the principal sum of HK$40,000,000.00 (“the Loan”)”.  (Emphasis added).

On the face of the Loan Agreement, 

-  it was made between the plaintiff and Zhao;

-  the term of loan was 10 months;

-  the interest rate was 5% monthly;

-  it stated that “the effective collateral agreed to by both parties shall be pledged with [the plaintiff], the details of which are set out in the pledge contract made between both parties”.

On the face of the Supplemental Agreement (which was actually entitled “Loan Receipt”),

-  it stated that Zhao was borrowing HK$40m equivalent to RMB32m from Li Mingzhong (“LMZ”), who is the plaintiff’s brother;

-  the term of loan was 1 month;

-  the interest rate was 2.5% monthly;

-  it stated that “this loan is secured with the convertible bonds of [D2], as set out in the contract between [D1] as the chargor and [the plaintiff] as the beneficiary of the loan”.

11. The Statement of Claim went on to plead that the plaintiff’s obligation to advance the Loan was conditional upon the plaintiff receiving security, which was by way of a charge as follows (para. 11):

“By a charge dated 20 May 2013 executed by [D1] in favour of the [plaintiff], [D1] (and/or Zhao) in consideration of the [plaintiff] agreeing to make available the Loan to Zhao upon the terms and conditions of the Loan Agreement and the Supplemental Agreement as legal and beneficial owner charges by way of first fixed charge the two convertible bonds in the principal sum of HK$20,000,000 (“the Convertible Bonds”) issued by [D2] to the [plaintiff] as continuing security for payment and discharge of the secured indebtedness (i.e. principal, interest or fees payable by Zhao under the Loan Agreement, Supplemental Agreement and other moneys secured by the charge (“the Charge”)”. (Emphasis added).

12. It is common ground that certificates for two convertible bonds and transfer forms were delivered by D1 to the plaintiff on 20 May 2013.

13. Prior to that, on 17 May 2013 Zhao had signed an “Authorization Letter” (entitled “Letter of Entrusted Payment”) which stated

“On 17 May 2013, I [Zhao] borrowed forty million Hong Kong dollars only (equivalent to RMB thirty two million only) from [LMZ]. ... I hereby entrust [LMZ] to pay the above loan to the account I designate (account name: Zhu Lifang [“Zhu LF”], account no: ...)… Payment of the above amount by [LMZ] to the account I designate shall be deemed as the receipt by me of the above loan, and I will be liable for all legal responsibilities arising as a result”.

14. It is not disputed that Zhao also signed on 6 online banking electronic receipts dated 17 May 2013 indicating payments from LMZ to Zhu LF.  If one added up the amounts in the receipts, one would arrive at RMB32m.

15. It was pleaded in the Statement of Claim that Zhao failed to repay the plaintiff and that on 3 July 2013 the plaintiff’s solicitors demanded that the title of the Convertible Bonds be transferred to him.

16. On 14 July 2013 Zhao’s PRC lawyers wrote to D2, alleging that the plaintiff had not in fact lent any money to Zhao, that consequently the Charge was null and void and that all acts thereunder should be rescinded.  D2 took no action in respect of the plaintiff’s transfer request.

17. On 26 November 2013 the plaintiff commenced the action against D1 and D2. 

18. On 27 February 2014, D1 filed a Defence which alleged essentially that there was a total failure of consideration as the plaintiff had failed to advance the Loan to Zhao.  As I have mentioned earlier in this judgment, D2 had pleaded in its Defence that it adopted a neutral stance.

19. The plaintiff applied for summary judgment.  The plaintiff filed 2 affirmations. In the first one (made on 10 April 2014), he affirmed that

-  he “agreed to lend and did lend to Zhao” HK$40m (para. 8)
-  on 17 May 2013 he had directed the “following deposits totaling RMB32,000,000 to be deposited into [Zhu LF’s] account ... (para. 19)
	RMB
	6,800,000
	5,000,000
	5,700,000
	5,200,000
	8,000,000
	1,300,000
Total:	32,000,000”

-  “ ... it is clear that the Sum [defined in para. 15 as RMB32,000,000 the agreed equivalent of HK$40,000,000] under the Loan has [been] advanced to Zhao” (para. 41). 

20. In opposition, Wang made an affirmation on 24 May 2014 in which he said:

-  Zhao had never received any money from the plaintiff pursuant to the Loan Agreement or the Supplemental Agreement (paras. 3 and 9); 

-  the plaintiff was not a party to the Supplemental Agreement or the Authorization Letter, as the parties were Zhao and LMZ (paras. 11-13);

-  the plaintiff misrepresented to Zhao that he (the plaintiff) could “jack up” the share price of D2, that the investment activities would be legal as Zhu LF would be used as middleman, but as the plaintiff would have to come up with $40m first, Zhao would need to give him 20m worth of convertible bonds in D2 as security (paras. 14-20);

-  Zhao did not know Zhu LF who was the plaintiff’s agent and he “had no personal knowledge whether the money under the so-called Loan Agreement (between the plaintiff and [Zhao]) and the [Supplemental Agreement] (between [LMZ] and [Zhao]) was in fact transferred to [Zhu LF]” (para. 24).

Wang’s affirmation was expressed to have been authorized by Zhao, who is said to have been detained in prison on the mainland since August 2013.

21. In the plaintiff’s affirmation in reply (made on 29 May 2014), he addressed the issues dealing with (1) his relationship with LMZ and (2) LMZ’s involvement with the Loan Agreement and the Supplemental Agreement. He said his brother had entered into the Supplemental Agreement on his behalf, the purpose was to vary the interest rate and the term of the loan (para. 3) and he (the plaintiff) had instructed and authorized his brother to “advance the sum under the Loan Agreement ... namely RMB 32 million ... to an account specified by ... Zhao, namely the account of [Zhu LF]” (para. 4).  He then said (para. 5):

“As such,

(1) [LMZ] was acting on my behalf when he transferred the Sum under the Loan Agreement, as amended by the Supplemental Loan Agreement, to the account designated by [Zhao].

(2) The Sum was transferred by [LMZ] to the account designated by [Zhao] pursuant to the Loan Agreement, as amended by the Supplemental Loan Agreement”.

22. The impression given was that it was a straightforward loan of HK$40 million (or its equivalent RMB32 million) from him to Zhao and paid into an account of Zhao’s agent, with the loan being secured by the Charge.  Nothing was said about the misrepresentation allegation, which had not been pleaded.

23. Apparently as a result of various adjournments, the hearing for summary judgment took 5 days.  On 13 June 2014 the judge gave judgment.  At para. 14, he found that “the material facts which have not been challenged on any reasonable basis” included the receipts “evidencing six payments of Renminbi totalling RMB32 million being the equivalent of HK$40 million”.  Accordingly the judge was satisfied that “the loan was made to [Zhao] in the form and manner alleged ...” (para. 15) and summary judgment was given. 

24. On 16 June 2014, D2 transferred the bonds to the plaintiff.

Fresh evidence

Overview of the evidence

25. As a result of proceedings started on the mainland by Zhao against the plaintiff and his brother LMZ and the recipient of funds Zhu LF after Seagroatt DHCJ’s judgment was given, certain documents have been ordered to be disclosed by the PRC courts.  These documents appear to cast a different light on the transaction.

26.1. The first group of documents are bank records disclosed by PRC court order which, in short, appear to show that on 17 May 2013, funds were transferred in various tranches from the plaintiff’s brother LMZ to Zhu LF and then back from Zhu LF – through the accounts of 張海濱 Zhang Haibin (“Zhang”) and 朱慧連 Zhu Weilin (“Zhu WL”) – to LMZ, at different times on the same day. 

26.2.  Zhang is said to be a business partner of the plaintiff, each holding 50% of a company called Shenzhen Huayong Investment Co Ltd (“Huayong”).  Zhu WL is said to be Zhang’s wife and related to Zhu LF, the recipient of funds under the Authorization Letter.  Zhu LF is said to be a senior member of staff of that company.

26.3.  In other words, instead of a total of RMB32m going only in one direction from the plaintiff’s brother LMZ to Zhao’s agent Zhu LF on 17 May 2013 (which was the impression given by the 6 online banking electronic receipts exhibited by the plaintiff), the bank records appear to show that there was a “round robin” of fund movements, with Zhu LF channeling funds back to LMZ before he sent the other tranches to her, and ending up with all the funds going back to LMZ and not to Zhu LF.

27. The second group of documents are documents in PRC court proceedings, with the latest judgment being a judgment of the Shenzhen Intermediate Court dated 12 January 2015 dismissing Zhao’s claim, and the latest step taken in the proceedings being Zhao’s application to the Shenzhen High Court for review of that judgment. 

Issues

28. The plaintiff has objected to D1’s summonses for this fresh evidence to be adduced, focusing on the bank records. 

29.1. The first issue he raised was whether the bank records can be used for the purposes of the present proceedings. Counsel for the plaintiff argued that assuming PRC law to be the same as Hong Kong law in the absence of expert evidence to the contrary, the documents, having been disclosed on discovery, are subject to the implied undertaking that such documents are not to be used otherwise than in the mainland proceedings. 

29.2. The second issue was whether the PRC proceedings and appeal created res judicata.

29.3. The third issue was whether the documents comply with the conditions in Ladd v Marshall (1954) 1 WLR 1489. 

Discussion

30.1. In relation to the first issue, it is well-established law in Hong Kong that documents disclosed on discovery are subject to the implied undertaking referred to above, and there is no expert evidence before me that PRC law is different from Hong Kong law. 

30.2.  Counsel for D1 argued first that that undertaking did not apply to D1, as it was not a party to the PRC proceedings although Zhao was.  With respect I do not accept that argument.  As was said in Distillers Co. (Biochemicals) Ltd v Times Newspapers Ltd [1975] 1 QB 613at 621,

“ ... The plaintiffs claim an overriding protection from publication and use of their documents which they were compelled to disclose in [another] action against them. They claim that this protection involves those into whose hands the documents come ... I do not doubt the correctness of this proposition; I do not think that, on the authorities and for the proper administration of justice, it can be argued to the contrary. Those who disclose documents on discovery are entitled to the protection of the court against any use of the documents otherwise than in the action in which they are disclosed. I also consider that this protection can be extended to prevent the use of the documents by any person into whose hands they come unless it be directly connected with the action in which they are produced”. (Emphasis added).

30.3.  Moreover it is a particularly artificial argument in the present case where it is not disputed that D1 is controlled by Zhao, and no doubt Zhao or his lawyers intentionally passed the documents to D1.  It would make a mockery of the implied undertaking if a litigant could breach the undertaking in this way. 

30.4.  In my view the better argument raised on behalf of D1 was that the documents had been referred to by the PRC court and thus could be used under O.24 r.14A which provides:

“Any undertaking, whether express or implied, not to use a document for any purposes other than those of the proceedings in which it is disclosed shall cease to apply to such document after it has been read to or by the Court, or referred to, in open court, unless the Court for special reasons has otherwise ordered on the application of a party or of the person to whom the document belongs”.

30.5. In the judgment of the Shenzhen Intermediate Court of 12 January 2015, the court stated that it had investigated the accounts through which the funds had passed, stating specific names and numbers, and the transaction details.  That is a sufficient reference for the purpose of the above rule of court.  In SmithKline Beecham Biologicals SA v Connaught Laboratories Inc [1999] 4 All ER 498, where the judge said simply that he had read all the material before making his decision, it was held by the Court of Appeal that “his reference to that material, though compendious, was nevertheless a reference for the purposes of Ord 24, r14A”.   

30.6.  In conclusion on this issue, I take the view that assuming PRC law to be the same as Hong Kong law in the absence of expert evidence to the contrary, any implied undertaking not to use the bank records ceased to apply when they were referred to by the PRC court in its judgment which presumably was given in open court, there being no indication to the contrary.

31. As for the second issue, I can deal with it briefly.  The issue whether PRC judgments are final and conclusive in the light of the procuratorate’s role in requiring a retrial by the court (see Chiyu Banking Corp Ltd v Chan Tin Kwun [1996] 2 HKLR 395) remains one which has not received consideration by the Court of Final Appeal after argument.  The parties in First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd (2012) 15 HKCFAR 569 had agreed not to argue this issue in the Court of Appeal, and the issue was not discussed in the Court of Final Appeal judgment.  Accordingly I do not accept the argument for counsel for the plaintiff that by reason of the PRC judgment, D1 is estopped from disputing that the Loan had been advanced.

32.1.  Finally in relation to the third issue, the contest was over the “reasonable diligence” condition of Ladd v Marshall, in other words, whether D1 has shown that the bank records could not have been obtained at the hearing before Seagroatt DHCJ with reasonable diligence. 

32.2.  I think counsel for the plaintiff is right when he said that the proceedings on the mainland could have been commenced earlier, and not only after Seagroatt DHCJ’s judgment.  I do not accept, in the absence of specific evidence, that simply because Zhao had been detained in a mainland prison since August 2013, he could not have given instructions to his lawyers there to commence proceedings.  Although Zhao claimed in his witness statement dated 17 June 2014 that he was “unaware of what was going on in the outside world”, as counsel for the plaintiff noted, Wang’s first affirmation made on 24 May 2014 had stated that he was authorized by Zhao to make the affirmation on behalf of D1. However it was not until 26 June 2014 that Zhao signed 民事訴訟 (civil action) to commence the PRC proceedings against the plaintiff, LMZ and Zhu LF to cancel the Loan Agreement and Supplemental Agreement. 

32.3.  Having said that, I accept the contention advanced by counsel for D1 that it took some time for the bank records to be obtained through the PRC courts.  Zhu LF’s records were only obtained on 28 September 2014 and those of Zhang, Zhu WL and LMZ were only obtained on 30 December 2014.  It thus took 3-6 months for the documents to be obtained through the mainland proceedings.  Accordingly even if Zhao had immediately started the mainland proceedings when the summons for summary judgment was issued (April 2014), the documents would still not have been obtained by June 2014 (when the Order 14 hearing finished and judgment was given) only 2 months later.  In this regard, I do not think D1 or Zhao can be criticized for not starting the mainland proceedings when the plaintiff sent his letter before action or even when the statement of claim was filed.  The need to search for evidence became acute only when the summary judgment summons was filed.  I therefore take the view that the 1^st condition of Ladd v Marshall has been satisfied. 

32.4.  I do not think counsel for the plaintiff seriously challenged the other two conditions.  Taking the 3^rd condition first, the bank records are evidence which are inherently not improbable.  As for the 2^nd condition, suffice it to say that the evidence of “round robin” payments – which appear to show that the funds which were supposed to have been “loaned” to Zhao were channeled back to LMZ – would have had an important effect on the mind of the judge. In saying this, I am of course aware that the plaintiff may well have other evidence to be adduced to rebut this fresh evidence, but it is trite that all that a defendant needs to show on an O.14 application is a triable issue. 

33. In the special circumstances of the present case, I am persuaded that the fresh evidence should be admitted on the appeal. 

Order

34. I would therefore make an order in terms of para. 1 of D1’s summonses filed on 12 January 2015 and 16 April 2015.  I would also make an order nisi that the costs of the summonses be in the cause of the appeal. 

Security for costs

35.1.  D1 is incorporated outside the jurisdiction, and trading in D2 shares has been suspended.  D1 has not paid the plaintiff the costs ordered below.  These are all factors that would normally have pointed towards an order for security for costs.

35.2.  However it follows from the discussion above regarding the evidence of the “round robin” flow of funds that D1 may well have a meritorious appeal from the summary judgment as it only needs to show a triable issue.  Of course the plaintiff may or may not have evidence to rebut the fresh evidence by the time of the appeal, but he has not sought to adduce this evidence yet, nor did he propose that the summons for security for costs should be adjourned pending my decision on D1’s summonses to adduce fresh evidence. 

Order

36. That being the case, in the exercise of my discretion I would make no order in the plaintiff’s security for costs summons save

(1)  to indicate that if I am overturned on appeal (if any) and it is held that security should have been ordered, I would have reduced the sum sought to $300,000 and

(2)   to make an order nisi that the plaintiff should have the costs up to the date of D1’s first fresh evidence summons. 

Finally I would like to thank both counsel for their able assistance.